Deming's Point #14 as Applied to the Insurance Industry

January 2009

Dr. W. Edwards Deming's Point #14 culminates all of his preceding 13 points—yet it introduces some new notions at the same time.

by John Pryor
John Pryor Insurance Consulting, Inc.

Deming's key admonitions to both leaders and managers as part of Point #14 are:

• Start as soon as possible
• Everyone can take part (as a team)
• Embark on construction of organization [a verb, not a noun] for quality.

Hindsight is always 20:20, of course, but you have to think how different the outcome may have been in today's financial meltdown had CEOs of multiple national and international financial service companies practiced these principles and disciplines.

Property-casualty insurance companies in general (so far) seem to have "dodged this bullet" unlike banks and other non-insurance financial organizations that typically are higher leveraged than is customary than for P&C insurance companies. Insurance companies typically have highly liquid investment portfolios that are more conservative—with much less volatility—than other financial organizations. Yet many insurance companies are floundering. Have those in trouble understood and practiced:

• Systems thinking?
• Continuous performance improvement?
• Teamwork?
• Strategic planning at all levels?
• Listening to the "Voice of the Customer" (both internal and external)?
• Training, education, and self-improvement of all staff?
• Leadership—in addition to management (and understand the difference)?
• Cross-functional communication and planning?
• Put it all together in a Balanced Score Card?

These questions, and no doubt others, will perhaps provide some element of insight. Another is the Insurance Institute of America program "Delivering Insurance Services" (AIS-25).

This discipline and common body of knowledge seems to have been missed by many business schools and MBA programs where many insurance executives are concerned. It's never too late to compensate for that omission!

This educational foundation from the Institutes should then be followed by training of key management people as Lean Six Sigma "Green Belts"—with about 1 in 10 of the Green Belts ultimately advancing to "Black Belt" certification. That's my remedy for the CEO of every organization in our industry not already practicing these disciplines and best practices. What's your solution for them?

Now let's talk more specifically about Dr. Deming's 14th Point. It is:

Take action to accomplish the transformation

These are Dr. Deming's concluding remarks:

1. Management in authority will struggle over every one of the above 13 points, the deadly diseases, the obstacles. They will agree on their meaning and on the direction to take. They will agree to carry out the new philosophy.

2. Management in authority will take pride in their adoption of the new philosophy and in their new responsibilities. They will have courage to break with tradition, even to the point of exile among their peers.

3. Management in authority will explain by seminars and other means to a critical mass of people in the company why change is necessary, and that the change will involve everybody. Enough people in the company must understand the 14 points.

   1. This whole movement may be instituted and carried out by middle management, speaking with one voice.

4. Every activity, every job is a part of a process. A flow diagram of any process will divide the work into stages. The stages as a whole form a process. The stages are not individual entities, each running at maximum profit. A flow diagram, simple or complex, is an example of a theory—an idea. Work comes into any stage, changes state, and moves on into the next stage. Any stage has a customer, the next stage. The final stage will send product or service to the ultimate customer, he who buys the product or the service. At every stage there will be:

   1. Production - change of state, input changes to output. Something happens to material or papers that come into any stage. They go out in a different state.

   2. Continual improvement of methods and procedures, aimed at better satisfaction of the customer (user) at the next stage.

5. Start as soon as possible to construct with deliberate speed an organization to guide continual improvement of quality. The Shewhart cycle (see below) will be helpful as a procedure to follow for improvement of any stage; also as a procedure for finding a special cause detected by statistical signal [in a Control Chart]. The reason to study the results of a change is to try to learn how to improve tomorrow's product, or next year's crop. Planning requires prediction. The results of a change or test may enhance our degree of belief for prediction, for planning. Step 4 of the Shewhart cycle (study the results; what did we learn from the change?) will lead:

   1. to improvement of any stage, and

   2. to better satisfaction of the customer for that stage.

6. Everyone can take part in a team. The aim of a team is to improve the input and the output of any stage. A team may well be composed of people from different staff areas. A team has a customer. Everyone on the team has a chance to contribute ideas, plans, and figures; but anyone may expect to find some of his best ideas submerged by consensus of the team. He may have a good chance on the later time around the cycle. A good team has a social memory. At successive sessions, people may tear up what they did in the previous session and make a fresh start with clearer ideas. This is a sign of advancement.

7. Embark on construction of organization for quality. This step will require participation of knowledgeable statisticians. A group, a team, should have an aim, a job, a goal. A statement thereof must not be specific in detail, else it stifle initiative. By working in this way, everyone will see what he can do and what only top management can do.

The focus is on the importance of a system and systems thinking. Dr. Deming defines a system as "a network of interdependent components that work together to try to accomplish the aim of the system." He makes some additional points about a system:

• It must have an aim—for without an aim that can be no system.
• The system is a "value judgment" that needs to be clear to everyone within the system including plans for the future.
• The system's component parts need not each be clearly defined and documented.
• However, management of a system requires knowledge of these relationships between the elements of the system and of the people who work within it.
• A system, of necessity, must be managed as it won't manage itself.
• The secret is cross-functional and cross-discipline cooperation between the elements within a system—as opposed to each of them remaining within their own "silos"—all in support of the aim or purpose of the system.

Dr. Deming quotes St. Paul as one who—2,000 years ago—understood a system when he wrote in I Corinthians 12: 12 (NIV):

• The body is a unit, though it is made up of many parts; and though all its parts are many, they form one body … Now the body is not made up of one part but of many. If the foot should say, "Because I am not a hand, I do not belong to the body," it would not for that reason cease to be part of the body …

• The eye cannot say to the hand, "I don't need you!" And the head cannot say to the feet, "I don't need you!" On the contrary, those parts of the body that seem to be weaker are indispensable and the parts that we think are less honorable we treat with special honor. …

• But God has combined the members of the body and has given greater honor to the parts that lacked it, so that there should be no division in the body, but that its parts should have equal concern for each other.

• If one part suffers, every part suffers with it; if one part is honored, every part rejoices with it.

In his (now considered a classic) The Fifth Discipline, Peter Senge offers a similar yet more succinct definition of a system and how a system is "bound by invisible fabrics of interrelated actions …" and how systems thinking, his "fifth discipline" is so critical to organizational and personal success.

We can't leave a discussion of systems without also commenting on Deming's notion of a System of Profound Knowledge (SoPK). It's composed of four elements:

Appreciation for a System	Theory of Variation
Theory of Knowledge	Understanding of Psychology

Space doesn't permit much expansion on the elements but here are some very brief explanations:

• Appreciation for a system is one's understanding of the past few paragraphs and how component parts of a system are interdependent on one another.

• Variation is based on appreciation of a "stable system" in which variation is limited to "common cause variation" and not indicating any "special cause variation." The latter confirms that a process or system is not stable and needs to be redesigned to restore control of the process. Control charts are used to make this determination.

• Knowledge is based on theories that help managers predict the future—and skills to revise hypotheses to more accurately design processes and systems to generate predictable outcomes.

• Psychology brings the human element into the data interpretation process. It's critical to temper (not tamper) data with an understanding of the fact that people are part and parcel of systems—and their presence needs to be recognized.

More information on SoPK is available in Dr. Deming's books as well as in publications of the American Society for Quality.

The "Shewhart Cycle for Learning and Improvement" is more commonly referred to as the PDSA cycle, i.e., Plan, Do, Check, Act. In Six Sigma, it's referred to as DMIAC:

• Define the problem and what it is the customer (internal or external) expects.
• Measure the defects (variation) in each process or system.
• Analyze the data and discover (root) causes of the problem. Improve [emphasis bold] the process to eliminate defects (variation).
• Control the process to be certain defects (variation) do not continue.

PDSA is best illustrated in a circular format, as depicted in Figure 1.

Click here for Figure 1: PDSA Cycle

As you can readily see, each approach has the same intended outcome: continuous performance and process improvement.

When implemented properly and completely—some would say "totally" (hence the earlier title of "Total Quality Management")—the results are going to be outstanding in terms of reducing costs, improving morale, exceeding customer expectations, achieving long-term strategic goals as well as annual operating objectives.

What more could customers, or boards of directors, or regulators, or politicians expect of any organization?

Conclusion

Where do we go from here with this series on continuous performance improvement? In case you're assuming Dr. Deming's 14th and last point concludes this series … wrong! Next we'll cover his highly helpful "postscript" of "Diseases and Obstacles"—all of which are to be avoided, of course.

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